Tourism

Maghreb – Traveling tides may trickle

by Executive Staff
written by Executive Staff

One axis of economic development in the Maghreb is the fast growing tourism sector, which Morocco and Tunisia have made a top priority. Algeria, which can afford to fall back on its oil and gas industry, is looking to develop its tourism sector, although the country’s perpetual security problems will make it more of an “adventure” destination than a getaway. Since 2006, Algeria has pushed through legislative reforms to facilitate foreign and local investment in the tourism sector and reports indicate that the country is particularly interested in developing cultural tourism.

Tourism in the Maghreb, while briefly faltering after September 11, 2001, recovered and then rapidly advanced to record levels in Tunisia and Morocco. But many analysts worry that a decline in tourist arrivals to the region is imminent. Tourism contributes nearly $3 billion a year to Morocco’s economy and the Tourism Ministry is implementing a plan, ‘Morocco 2010’, to increase the number of tourist arrivals to 10 million by 2010. Growth levels have been encouraging, but there was some stagnation in the crucial summer period of 2008. According to the Tourism Ministry’s Observatory of Tourism Statistics, tourism receipts had not evolved in the period of January – August 2008 ($4.76 billion) compared to the same period of 2007 ($4.8 billion). However, the number of tourist arrivals to the kingdom was up 2% for the same period. A period of stagnation or even decline in tourist arrivals to the kingdom could easily come about in 2009, as Europeans cut back on spending in response to the financial crisis and Morocco may be forced to revisit or delay some of the objectives of its 2010 plan.

Tunisia
Tunisia’s tourism action plan looks further ahead to 2016 and aims to improve the marketing of the country to European markets. A new round of contracts with leading tour operators is being counted on to reverse a regression in the flow of tourists to the country, as are improvements in hotel capacity. Mega-projects such as Tunis Sports City and Mediterranean Gate City, scheduled to reach completion in the coming years, will also boost arrivals. Tunisia is also looking to expand interregional tourism, and held Tunisian tourism week in the Libyan capital Tripoli in January of 2008.
Economic liberalization in Morocco and Tunisia is ushering in an era of unprecedented closeness between these countries and their Western European neighbors to the north. Closer relations mean a boost to sectors like tourism, which has been increasingly dynamic over the past several years. The global economic downturn could expose the flipside of this closeness if the Maghreb’s economic dependence on Europe is not met with the support that was promised when Western markets seemed invincible.

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Private Equity

Maghreb – Opportune shores

by Executive Staff
written by Executive Staff

North Africa started in 2008 as the least-noticed market in the region, but it has emerged to become a new investment destination for private equity firms. While most region specific funds use some form of the monicker ‘Middle East and North Africa’, the later half was almost forgotten until this year, when North Africa came to mean more than just Egypt and more than occasionally big buyout deals. The growing popularity is derived from the diverse industries and opportunities waiting to be tapped in the Maghreb and Libya, as they emerge from their economic infancy in 2009 with potential for growth as destinations for regional and international private equity.

Private equity firms did not have dedicated operations in the Maghreb until the late 1990s. Capital Invest, based and doing deals in Morocco, launched their operations in 2000 after significant regulatory changes induced the firm to structure a fund for investors looking to work with businesses in the kingdom. Capital Invest’s local status enabled it to navigate Moroccan legal and regulatory challenges that prove daunting for foreigners. However, most Morocco-dedicated funds fail to look to the rest of the Maghreb and are myopic in their vision for expanding companies within smaller domestic markets. Only some have recognized that big business lies in financing regional expansion plans for businesses, increasing the potential consumer base and building rapport with host governments in the remainder of the region.
The asset class can supply the demands of North Africa, where a chronic lack of financial intermediaries stymies growth, hinders entrepreneurship, and cripples the ability and desire to innovate. While private equity is not the only fund type — Julius Baer launched a Northern Africa Fund for listed equities in 2008 — it offers a distinct advantage for the numerous small-and medium-sized enterprises often managed by entrepreneurs and other firms, where the business model is attractive but cannot succeed without financing. Another plus, although pitched to a lesser extent in the region’s trade circles, is the ability of private equity fund managers who go into a deal, spot flaws in corporate governance, and revamp firms and encourage them to become more transparent. Local fund managers and their counterparts in Europe and the Middle East will look to two markets in particular: Tunisia, which holds title to the most developed business environment for private equity investing, and Libya, where Qaddafi’s socialist model had first led to an obliteration of the private sector but where the revolutionary-cum- leader is now seemingly coming to terms with economic reality and advocates the need to (re)develop a veritable private sector, encouraging legislation to emphasize the point.

Tapping Tuninvest
Within North Africa, Tunisia has the longest history of private equity firms. In the 1990s, Tuninvest began to serve Tunisian businesses but then grew with backing from the International Finance Corporation, which supported the firm’s expansion to the rest of the Maghreb — Algeria and Morocco — that share many similarities with the Tunisian market, including similar legal systems and traditions. The timing was perfect and excess liquidity from the Gulf seemed to strengthen Tuninvest’s fundraising climate at a time when exit opportunities were coming into sync. With the region’s bulwark bourses in Casablanca and Tunisia performing exceptionally well, opportunities for strategic sales to numerous European and Gulf firms were beginning to expand into the Maghreb’s markets.
In 2008, Tuninvest’s Maghreb Private Equity Fund II closed at $193 million, 25-50% higher than its initial targets, displaying a trend to find qualified general partners and fund managers as well as the increased attractiveness for the asset class in North Africa. The close was lengthy, which Tuninvest attributed to legal constraints affecting investors in the fund, including the International Finance Corporation, the European Investment Bank, the African Development Bank, and the UK government’s CDC Group.
Tuninvest’s fund is already 50% invested and the remaining capital will be used to finance businesses throughout North Africa, including the region’s more frontier markets in Algeria and Libya. Egypt-based Citadel Capital is taking similar steps and in 2008 opened an Algerian office, with others set to open in both Libya and Syria soon. In these new markets, Tuninvest will balance the larger market risks with higher potential rewards through lucrative deals, which are financed from Citadel Capital raising its capital on a deal-by-deal basis.

Libya
Just west of Egypt lies a market with amazing potential and ameliorating regulatory climate, which has encouraged private equity shops to scout for deals. This is a result of Libya having the largest proven oil reserves in Africa, egged on by the introduction of Law 443 in 2006, which has encouraged the development of Libya’s private sector. Colony Capital, a global investor in private equity with an emphasis on real estate deals, received the green light from Libyan regulators to move forward with a deal to buy out a government-owned oil refining and distribution business. This agreement amazed investors at the end of 2007 because the size of the investment, at $5.9 billion, would have made buyout target Tamoil the largest in Africa to date, beating hefty deals in both Egypt and South Africa. Secondly, Colony Capital won the bid over The Carlyle Group, the ubiquitous buyout shop.
Although the specifics surrounding the deal are not clear, some have speculated that Colony Capital was to usher in other interested limited partners who were investing in the deal to get a taste for the Libya market. One limited partner, Equity International, planned to use the transaction as a base off which to spot homebuilding opportunities and other potential partnerships with the Libyan government, which plans to build 530,000 new houses by 2012. Other co-investors might have been courting the government with further potential opportunities through partnerships with the Libyan Investment Authority, which invests $40 billion in assets from oil revenues through Libya’s own sovereign wealth fund. In 2008, however, the momentum of the deal lost traction. The reason cited by a number of businessmen is the political risk in dealing with a still overly-controlling Colonel Qaddafi and a regime type that is still impervious to standard business methods and best practices. Some attributed the 2008 failure of the deal to a continued reluctance and non- cooperation on the part of the Libyan government in handing over Tamoil’s financial records.
Colony Capital’s problems do not plague all of the country’s private equity deals and others demonstrated that it is very possible to work with a local partner who, by law, must own a 35% stake of the business. In 2006, Venture Capital Bank BSC and Global Emerging Markets successfully completed a buyout of Challenger ltd. for a 40% stake. In early 2008, Libya piqued the interest of private equity firm Klesch to invest in an $8 billion project for oil refining and an aluminum smelter.
Egged on, Libu Capital, set up by Phoenicia Group Libya, raised $95 million from Libyan investors, including the Libyan Arab African Investment Group, and planned to raise the remaining $205 million for a $300 million close in 2008 from foreign investors. The fund is aiming to deal with projects in the country’s lucrative oil services and construction outfits to supply the demand for homemade cement and other downstream building materials. The move to seek additional funding came from “investor enthusiasm,” according to a press statement. Ryad Sunusi, president and CEO of Phoenicia Group, warned investors not to partner with funds lacking the backing of the Libyan government or with no practical experience in the country. Citing Lion’s Pride, Tuareg Capital, and Marj Ventures, he noted that they have “a very limited understanding of the Libyan legal and business environment and no strategic game plan or long-term planning and relationships for managing a successful investment portfolio.”
The movements in the Libyan market in 2008 reflect a slowly-growing optimism. Fund managers and investors will continue to watch Libya from the sidelines as the government moves forward with private sector development plans. Further moves to increase the country’s exit possibilities will encourage investors in a similar fashion that occurred in early 2007, when Libya inaugurated its first stock market, which Libyan Minister of Economy and Trade Tayeb Essafi explained as a gesture to reinforce investor confidence and to, most likely, offer a forum in which traders can buy and sell assets without the tight control of the government.

Smart partnering
Navigating the regulatory thresholds in North Africa demands from private equity funds a focus on strategy, particularly recruiting a due diligence team with extensive local contacts and relationships with each country’s institutions and the people behind them. The need to understand reputations and size up markets with the most accurate information is the only way to sharpen business acumen during fund lives of five to seven years. Competition from firms with broader regional mandates, including those funded with capital from the GCC, have expressed willingness to do deals on a case-by-case basis in North Africa, but the deals with the most hidden underlying value are not only with large, headline- grabbing buyouts. Small-and-medium-sized enterprises, which North Africa has in abundance, are often undervalued and need some private equity as well as the savoir-faire of the funds’ operations teams to bring in attractive prices at the exit.

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Consumer Society

IWC – Watch wealth

by Executive Staff
written by Executive Staff

Luxury wristwatches are a status symbol in a region where material goods are the best indicator of a person’s wealth. Covered with gems or multifunctional features, watches tend to tell the story of their owner.

From pocket watches to wristwatches with multiple complications, mechanical timepieces have been revamped one century to the next. In the 1970s they faced a crisis, as quartz watches became fashionable. “During this period, it was the Middle East that partly saved IWC, due to special orders some important people used to place with us,” said renowned IWC designer Kurt Klaus. IWC has worked for over 30 years in the Middle East, initially perceived as a niche market where the company supplied royal families in Dubai and Oman.
Today, wristwatch makers are taking a keen interest in the region, perceived as a lucrative market because of its recent oil riches. “The Middle East is an important region for brands where diamond and gold watch sales account for a big share of the market. Arab clients tend to appreciate flashy watches with gold plating and stones, while this is not usually the case in Europe,” said Mher Atamian of Atamian Ets. There is still room for growth, however. According to Gianfranco D’Attis, brand manager at IWC, today only 5-10% of the company’s turnover is generated in the Middle East. “I would say we sell less than 5,000 pieces every year in the region,” he added.

Time in the Emirates
Roland Streule, regional brand manager of Rado, stressed that the wristwatch industry, especially high-end products, were doing well, particularly in the Middle East. “The UAE is the biggest importer of Swiss-made watches in the region, followed by Saudi Arabia,” he recently told Gulf News. Visitors to Dubai form a large segment of the market for wrist watches in the UAE. “There’s a big floating population in Dubai and they are big buyers of Swiss watches,” Streule said.
For IWC the UAE market is also the strongest in the region, due to the massive tourism influx in the emirate every year. “It is followed by Turkey and then Lebanon, where people are attracted to the brand’s classy understatement and chic,” D’Attis added.
In the Middle East the popularity of brands varies from one country to another. Among IWC’s line-up, the most popular collection is the Portuguese line, which represents a 50% share of the company’s commercial turnover. “The second best line is the Pilot which accounts for 20 to 25%. Such figures are replicated, however, all over the world as these two lines represent about 75% of our yearly turnover,” D’Attis explained.
Atamian said that his company, which carries brands both targeting the middle and high-end segment of the population, has experienced larger growth levels in the latter. “Our high-end leading brands are Breguet, Blancpain, IWC, Jaeger-LeCoultre and Ulysse Nardin. In the category between $1,500 and $5,000, TAG Heuer leads the way while Baume & Mercier, Longines and Hamilton have seen significant improvements. Our best-selling brands in the medium segment would be Tissot, CK, D&G and Ferre,” he said.
IWC developer Kurt Klaus believes that future watch trends lie in larger timepieces. “The fashion started initially with the Portuguese and is still going strong. Nonetheless, the smaller Portuguese design is also quite popular with high-powered women,” he pointed out.
In order to promote their designs more efficiently, companies have developed extensive distribution networks. Atamian has boutiques located in major cities in Lebanon and Syria. As for IWC, the recent trend adopted by the company has been to curb the number of points of sales. “We are investing a lot in our distribution network, as we want to grow in terms of image while making it more exclusive. We have thus reduced the number of boutiques from 1,200 to 800,” D’Attis stated.
The company is also relying on powerful marketing campaigns as well as entertainment events such as the recent watch making class that was held in Lebanon during the month of November. “IWC is a wholesale brand that reaches out to a special clientele, something that can be achieved only through strategic local partnerships,” D’Attis said.

Challenges ahead
Many challenges await wristwatch makers in the Middle East. One is the emergence of multifunctional devices, a 21st century staple. Various watch analysts have doubts as to whether the wristwatch industry can survive the cell phone and the iPod war — except maybe for segments including technology watches that are equipped with GPS and other gadgets, cheap watches and luxurious masterpieces.
On the other hand, Atamian said, gadgets such as cell phones and iPods will have no effect on watch sales as a piece is no longer perceived to be a device that only shows time. “It has become a jewelry piece or a fashion accessory that is a necessity on every wrist.”
The manager believes that the grey market remains the biggest problem for distributors. “Unauthorized watch dealers import and sell watches at prices below suggested market prices. These dealers do not have high overheads, such as customs duties or VAT, while their shops are located in relatively moderate areas with low rents. They can thus afford to sell their products with minimal profit margins. Often, clients are not aware that watches sold on the grey market will not always be covered by the guarantee if they are damaged. Also, some of the watches sold on the grey market are in fact second-hand items, renovated and sold as new,” he said.
According to Streule, “it was difficult to quantify how much damage fake products were doing to the sales of original products. It is possible that those who buy fake products can’t afford to buy the original so it is not a loss.” Today, the biggest source of fake watches is China. “We are working everywhere with the local authorities to combat fake products and in the recent past we have confiscated several thousand watches in the Far East, including China,” Streule said.
A further challenge awaiting wristwatch makers and distributors alike is the adverse economic condition and rampant recession that have darkened forecasts around the world. Atamian explained that the sales in the high-end segment almost doubled from previous levels, but the recent worldwide problems will definitely have an effect, it just “remains to be seen by how much.”
In order to mitigate the effects of the recession, IWC is focusing more on emerging markets including India and Turkey where the economic pressure will be less significant. For D’Attis, luxury products will certainly suffer from the recession, as more people become unnerved by gloomy prospects for the future. “Nonetheless, I believe that this will have a greater impact on lower end segments, essentially timepieces that fall in the $5,000 bracket, while higher end products remain less affected. People who can afford watches priced between $7,000 and $20,000 will not stop buying luxury items,” he said.

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Banking

Oman – The vault of profit

by Executive Staff
written by Executive Staff

Omani banks have enjoyed substantial insulation from the turmoil of the international financial crisis. Banks across the sultanate have reported robust, double-digit growth performance throughout 2008. “Whilst the non-fee income of these banks to some extent was diminished by the fall in the local market,” said Global Investment House (GIH), “core income growth supported their superior performance.” The Omani government’s economic diversification plans to move away from hefty reliance on hydrocarbons is a major driver the banking sector’s continuous success. Unlike its Gulf counterparts, the Central Bank of Oman has announced there is no need for it to lend money to domestic banks, seeing as the sultanate has no problems with liquidity. However, in order to ease a possible forthcoming liquidity crunch, GIH said the central bank has “relaxed the compliance to the lending ratio requirement of the banks by indefinitely deferring its earlier decision to implement a stricter lending ratio of 82.5% from 85.0% imposed in June [2008].” In addition, the central bank authorized local banks to hold 3.0% of the 8.0% reserve requirement as CDs and cash portfolios of banks. “This move,” asserted GIH, “is expected to reintroduce liquidity worth RO300.0mn [$779 million].” The Economist Intelligence Unit expects Oman’s real GDP growth to fall to 5.7% in 2009, due to the inevitable downward motion of the global economy.

Top ranking banks in Oman are reveling in their combined profits and powerful performance in 2008. According to GIH, the combined profits of banks in the sultanate increased by 37.6% during the first nine months from $325.8 million to $448.3 million. The two leading banks — by market capitalization, market share of total sector credit, and deposits — Bank Muscat and the National Bank of Oman (NBO), posted significant year-on-year profit growth of 43.9% and 20.4%, respectively, by the end of the third quarter. None of the domestic banks reported any declines in profits. Although NBO and Oman International Bank (OIB) were “the two laggards in terms of profit growth,” noted GIH (NBO with 20.4% and OIB with 11.5%), it “is commendable that when some of the major regional banks in the GCC registered decline in profits, even the laggards in the Omani banking sector registered double digit growth.” Furthermore, “NBO commented that the growth in its profits for the nine month period reflected balanced growth across all the sectors and improvement in its cost to income ratio from 42.4% during 9M07 to 39.9% in 9M08.”

Forecast
All in all, the persistent diversification and efforts to increase confidence by the central bank and Capital Market Authority of Oman will go a long way in boosting the local markets. In addition, GIH commented that “the strong performance of Omani banks backed by core income growth reflects [the general] positive outlook on the sector in the medium term.” After their robust performance in 2008, the sultanate’s banks should continue to operate quite nicely well into and throughout 2009.

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Tourism

Lebanon – Hedonists hooray!

by Executive Staff
written by Executive Staff

In spite of the images of conflict and war associated with Lebanon over the last few years, the Land of the Cedars has (again) become one of the region’s party hubs, as the Lebanese paradox seems to attract many a night owl.

Hassan is a Moroccan banker working in Dubai. Ibiza, Saint Tropez and Mykonos bear no secrets for him. This summer, he spent a five-day vacation in Lebanon. “I would love to party at one of the open space bars and visit Gemmayze,” he said a week before his arrival. Gemmayze is one of Beirut’s trendy streets sought after by partygoers for bar- hopping. “I have heard so much about the Lebanese night life!” Hassan added.
According to Paul Ariss, president of the Syndicate of Restaurant and Café Owners, there are some 6,000 restaurants, cafés, pubs, night-clubs and discos in Lebanon, with the majority of restaurants, cafés and pubs targeting a clientele aged 17 to 35. A serious percentage of those enjoy a steady income and relatively low expenses, since most of the young women and men still live with their parents and clubbing and dining out is a major source of entertainment for them. Moreover, one million expatriates in the Arab world and Africa regularly visit Lebanon, and one of their favorite activities is discovering new places and menus.
Open space bars, beach parties and beautiful girls dancing against the backdrop of golden fireworks have become part of the Lebanese landscape. “Lebanon, as a party destination, can’t be compared to other countries in the region,” said Tony Habr, owner of Addmind, a company that creates, develops and manages concepts in the food, beverage and hospitality business.
For Ramzi Adada, owner of Riva, a company that manages Island at the Riviera Beach hotel and employs over 80 people, Lebanese nightlife has evolved dramatically in the last 15 years. “While Lebanon used to lag behind Europe, it recently has caught up with most international clubbing scenes. The only type of entertainment we might still miss being gigantic clubs such as the ones in Ibiza, capable of accommodating 10,000 people,” he explained.

City with a soul
Lebanon being at the vanguard of the party trade can be attributed to the relatively lax regulations compared to its regional neighbors. “In the UAE more restrictions are imposed on clubs, which are, as an example, expected to close at three in the morning, whereas in Beirut they still receive people until dawn,” Habr said. The manager also pointed to the Lebanese crowd, which is able to liven up any venue. Clubs and bars alike are well decorated and are usually built around a sophisticated concept. “Beirut is a city with a soul, unlike other cities in the region, with the exception of Cairo that has another beat to it, one definitely more oriental. In Lebanon, East meets West,” Adada pointed out.
Nazih is a Jordanian investment banker who visited Lebanon this summer. Instead of spending four days like he originally planned, he ended up staying for more than a week. “The places here are unlike anything I have ever seen and people are also extremely friendly,” he said.
For Adada, one of the industry’s main strengths resides in the permanent metamorphosis and innovative approach. The local hedonistic culture gives the sector a powerful edge.
Quality of service provided is another strength of the Lebanese party trade. “Lebanese have gotten used to a certain level of quality on which they are not ready to compromise,” said Michel Razouk, manager of Rand R. The company, which employs about 70 people, runs and operates Sushi Bar, Cactus, and Graffiti Café as well as the L2 lounge-restaurant in Saida.
The reason behind the success of Lebanese venues? A very competitive market and a savvy client base. “Lebanese tend to lose interest rapidly, which forces club owners to redesign their venues every two years, while this period is usually longer for clubs in the West,” explained Habr.
The Lebanese party scene has been revamped in the last few years. Long gone are old-fashioned dance floors, as today the young women dance on tabletops instead. The scene resembles a huge house party where most people know each other. After all, about 80% of the clients are local, while this figure is only 50% in Jordan. Adada explained that at Island, about 60% of clients are Lebanese and the rest foreigners, many of them Syrians and Jordanians.
“Gemmayze, however, caters to a different crowd than what can be seen on the club scene and this might explain the growing number of Europeans we have seen in recent months,” said Razouk who estimates they might account for about 10% of the clientele.

Partying pays
Revenues depend upon the type of venue. While Razouk said that bar tabs start at $25 per person, club owners estimate an average ticket bill to end up between $80 and $150 per head. “Profitability is much higher for clubs, bars and cafés than for restaurants as profit margins are higher when alcohol is served,” Razouk pointed out. Adada believes that clubs can generate yearly revenues of three to five million dollars and have profit margins of about 35 to 40%.
In such a thriving sector, rumors of corruption abound. Habr reckoned that in some of the capital’s largest clubs tables may be sold to the highest bidder. “Corruption exists all over the world; it is not ethical but it is a reality, especially as some managers may think that someone who’s ready to splurge $500 on a table will certainly spend more. At the end of the day it is all about the manager,” he said. Last summer around the capital Arab tourists were paying hundreds of dollars for a reservation.
Despite some drawbacks, the industry is trying to replicate its success abroad. Habr said that his company started expanding after the 2006 War. “The war certainly pushed people to expand out of Lebanon,” Razouk, who plans to expand in Qatar with four concept restaurants, agreed. “However, the fact that Lebanon has been able to export its know-how is a great achievement in itself.”

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Private Equity

Iraq – For the intrepid investor

by Executive Staff
written by Executive Staff

Is Iraq ripe for private equity investment? The idea of putting a high performing asset class in what is still considered a war zone seems anathema to many. The lengthy investment terms of private equity appear inconsistent in volatile environments, but after a read of the headlines, industry watchers need only look at the deals fund managers have already made and the willingness of investors who partner in country-dedicated funds, or on a deal-by-deal basis, to realize the possibilities of Iraq as the next destination for private equity. In early 2008, news media reported that emerging markets fund manager Mark Mobius was looking for deals for private equity investments in Iraq. Though influential, Mobius will by no means be the first, but rather follows a crew of daring investors and fund managers who have already established operations in this frontier market.

Iraq is not a monolithic conflict and since the 2008 surge, tensions have quieted down somewhat. The Kurdistan Region, in particular, offers much promise for fund managers and investors. According to Scott Ogur of Scimitar, the risks of investing are lower there, yet, “since the region is still in Iraq, most investors apply a risk premium to it that was commensurate with Baghdad.” In his view, this offers a much sought-after investment environment for those with higher appetites for risk or at least deals where “most investors have missed an important nuance, leading them to overstate risk, and therefore depress asset prices.” The perceived risk premiums investors calculate are factored into decision making when looking to generate excess returns.

A headline economy
Rising oil prices on world markets brought a windfall in revenue for Iraq’s 2008 budget, but cautious budgeting means the country will still have a surplus at the end of the year. The increased government riches are complemented by an improving security situation with fewer civilian deaths and many of Iraq’s 18 provinces relatively safe, with violence largely limited to Baghdad, Diyala, Niniveh, and Salah al-Din.
Andrew Eberhart of The Marshall Fund — the first Iraq- dedicated private equity fund and the first to do a deal in the country — believes that “Iraq’s economy needs the fundamentals — food, shelter, and electricity, but the country can also benefit from technology investment that helps meet these needs.” The Marshall Fund has matched Iraqi demand for foreign capital and the increasingly favorable regulatory structures to support capital inflows. Both the federal Iraqi and regional Kurdistan parliament passed investment laws to encourage foreign investment and protect investors through the rule of law, property ownership in certain industries, and favorable tax holidays.
According to Eberhart, “the government is willing and eager to work with outside investors and there is no need to win hearts and minds in the government.” For private equity firms weary of operating in a potentially high-risk environment, the Overseas Private Investment Corporation, an independent arm of the US government, offers insurance against potential political risks, including expropriations, acts of terrorism and war, and political strife.
Eberhart noted that there is large potential outside of the energy sector, as Iraq was and could still be “the breadbasket of the Middle East” with a large amount of arable land and agriculture employing the most Iraqis after the public sector. Snags common to other sectors are also found in agriculture, which has been victim to chronic underinvestment. Following the fall of Saddam Hussein in 2003, the industry dropped, transforming the country from a net exporter to an importer of food. According to Eberhart, “there were crops, but farmers only had access to local markets.” He explained that the vast majority of crops rot on the vine or in storage. “The ability to come in and invest in processing and distribution is enormous.”

Fundraising
The Marshall Fund is currently fundraising from private investors “who understand the very real investment opportunity that exists in Iraq and also feel there is some potential social benefit, an economic development from investment and a way to complement other efforts of regional stability,” according to Eberhart. Limited partners of this sort must share the fund’s vision as it scours for opportunities. Kyle Stelma of Dunia Frontier Consultants noted that fundraising for deals in Iraq is “an interesting environment with a huge upside. There are initial risks but several alternative investment funds have decided to focus solely on Iraq, despite perceived risks.” Stelma estimates the majority of limited partners to be “individuals with one or two institutional investors,” projecting that, “as we see more successful exits and investments, there will be more institutional investors. There are now a number of large Middle Eastern institutional investors getting close to partnering. It’s just a matter of time.” Eberhart believes that while it might still be a bit early for big institutional investors like pension funds, “we expect to see them as we demonstrate success.”
The climate for making deals in Iraq stems the government’s willingness to revive enterprises that have lain fallow for years. Stelma noted that “a number are interested in former state-owned enterprises and the government is privatizing some of them and really trying to make these transactions work.” Iraq dearly needs for financial institutions, construction outfits, and agriculture-related business to lead the country through its post-conflict development.
Ogur’s group, Scimitar, does not use blind pool funds, the typical structure of a private equity fund, having found that they “are not always the best way to align interests of fund managers and investors in the regions where we invest.” Rather, they work with investors on a deal-by-deal basis. With Scimitar’s group of investors, “when we have a deal that meets our investment criteria, we use our own funds to secure and structure the deal, and we then get commitments from our investors.” The group’s investments total a dozen over the past six years, of various sizes ranging between $5-50 million, and have realized about half of its investments. Its Iraqi focus remains in the Kurdish region where contacts run to the top levels, which is an important requisite when working in the region.

Partnering for exits
In terms of exiting investments, the focus remains on selling companies to a strategic buyer. Ogur noticed a number of strategic buyers looking toward Kurdistan as a place to own and operate profitable businesses. “Turkish investors and businesses are extremely interested in Northern Iraq, despite the political tensions that are commonly mentioned between Turkey and the Kurds,” he noted.
Stelma’s has noticed growing interest from Indian, Chinese, and Turkish conglomerates, with growing opportunities for strategic sales. Outside of petrochemicals, regional and international conglomerates are currently the main exit possibilities, although these options will grow as more players enter the market.

Future outlook
The demand for the basics after long periods of neglect under Hussein and over the past five years makes Iraq’s future outlook strong. In an official visit to the US in October 2008, Iraqi Finance Minister Bayan Jabr Solagh emphasized the need for basic infrastructure, particularly water, electricity and housing. The immediate demand for 2.5 million housing units in a population of 28 million means nearly 10% of Iraqis need new homes. This figure alone should make the heads of real estate giants and property developers spin. According to Eberhart, “the government has inherited a lot of businesses from the private sector and Saddam’s private ownership. It embraces capitalism and is anxious to privatize investment. Ministers promote plans for outside investment and there is low or no costs for taking on operations.”
Eberhart also highlighted the strong demand for banking and the financial services sector. Although JP Morgan and HSBC are already in Iraq, the huge room to grow is evident in the lack of free flow of capital and the economy staying cash-based. Financial services could help sustain the already-high consumer market demand, which Eberhart believes could “find opportunities to grow in Iraq after franchise operations demonstrated success.”
Improvements at the macro level mean increased opportunities for foreign investors to remodel many of Iraq’s industries. As the government moves forth with privatizations and plans to stimulate the different industries, private equity is an ideal asset class to restructure and redevelop a potentially dynamic economy.

 

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Consumer Society

Automotives – Gearing down

by Executive Staff
written by Executive Staff

The automotive industry is feeling the full force of the global financial crisis. General Motors, Ford and Chrysler are on the brink of collapse after their failed bid to get $25 billion in aid from Congress and many of the major automakers are temporarily shutting down production plants as sales drop around the world. In the Middle East, however, car sales have not been so gloomy. Positive growth has been achieved by all the major brands in the region and massive amounts of investment are being put into improving car sales and after-sales facilities. Still, there is nervousness about the financial crisis’ impact on the Middle East, given the significant amounts of investment that have been made and are being made in the region. Thus, 2009 will be a precarious year for automakers and their local partners in the Middle East.

But 2008 was a good year overall for manufacturers in the Middle East. As Phil Horton, managing director of BMW Middle East, pointed out, “Our January to October sales across the Middle East are up 12% over the same period last year.” Horton is confident that BMW will achieve its sales target for 2008. Julian Millward-Hopkins, press manager for Mercedes-Benz, also reports that 2008 was a good year. “The performance of Mercedes-Benz in the region this year has been exceptional with deliveries currently up nearly 20% over the previous year. For the first time we achieved sales of over 10,000 vehicles for the first half of the year,” he said.

The big manufacturers’ new playground
The continued growth of BMW and Mercedes in the region is significant because the big three markets — US, Europe and Japan — are increasingly saturated and competition is becoming increasingly intense in the Middle East. Infiniti and Audi are two manufacturers that have rapidly increased their presence to capture some market potential, both launching a renewed, more substantial presence in 2005. Abhijit Pandit, director of marketing for Infiniti, reported that the Japanese company has achieved rapid growth since 2005 and now the Middle East is the number two market after the US. In 2008, Infiniti achieved 50% year-on-year growth. Audi tells a similar story. Jeff Mannering, managing director of Audi Middle East, stated that Audi believes it can end 2008 on strongly, “finishing with around 7,500 deliveries to customers, which is a healthy 18% increase over 2007.”
Rapid expansion is being undertaken by manufacturers and their local partners. Horton extolled BMW’s local import partners investments in the brand and stated that, “Our importers in Dubai, Abu Dhabi and Saudi Arabia are all undergoing multi-million dollar expansion plans to accommodate their growing business.” This rapid expansion, which is being replicated by almost all manufacturers in the region, has brought the challenge of ensuring that infrastructure keeps up with this expansion. “With growing sales the biggest challenge is always to provide a strong support system. Audi has invested heavily into training, continuous improvement in after-sales service and the development of our infrastructure,” said Mannering. For brands such as Infiniti that have yet to penetrate fully the Middle East, rapid programs of expansion are being rolled out. Pandit said that new showrooms are constantly being opened for Infiniti cars and by 2012 all the market in the GCC and Mediterranean markets will have exclusive facilities.
His company, Pandit said, “pioneered the crossover SUV with the Infiniti FX,” and now all the car manufacturers are bringing out new SUV crossover models, which are set to dominate sales in 2009. The SUV is an important segment of the car market in the Middle East in particular and, according to Pandit, dominates the luxury car sector. With global warming becoming increasingly important in the minds of consumers, the desire to have an SUV with lower emissions has given birth to the crossover SUV and their popularity has been insatiable. Thus all manufacturers are racing to get their versions onto the market. BMW has brought out the X6 Sport Activity Coupe, which has sold out the year’s quota, Audi reported a strong response to its anticipated Q5 and Mercedes has released the GLK, which is expected to achieve strong sales in the region.

Currency chicane
The major challenge that automakers have faced in 2008 has been currency fluctuation. For Infiniti, which deals in yen, this was a major challenge and for BMW and Mercedes, dealing with Euros, it has also been problematic. Horton also stated that “price increases for raw materials including oil, steel and energy,” were issues for manufacturers in 2008 and this decreased the profit margin.
But the biggest snag was encountered at the end of the year: the global financial crisis. In 2009, all manufacturers will be waiting and watching to see what its full implications on the region will be before they make any big decisions. Millward-Hopkins believes that the Middle East is in a much stronger position than the rest of the world, but “we are putting in measures to ensure that our distributors across the region provide customers with a suite of offers.” Thus, even in the surplus-rich GCC, manufacturers are preparing for customers to tighten their belts. “Oil prices are continuing to stay low but I hope the government will intervene as this is a big challenge for the region,” Pandit said. Although manufacturers are aggressively pushing forward their brands in the region, due to the economic crisis they will be hard pressed to achieve a growth on sales in 2009. As Horton stated, the biggest challenge next year will be, “to increase our sales over 2008.”

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Banking

Overview – Banks temper the tempest

by Executive Staff
written by Executive Staff

Before the fateful weekend of September 13-14, 2008, the hot topic on all bankers’ minds in the GCC was how to tackle inflation. Every country in the Gulf was battling ubiquitous, long-lasting and soaring inflation rates and deciding if they should de-peg their local currencies from the dollar. By mid-September, the picture was no longer so black and white — banks in the Gulf, like everyone else in the world, were scrambling to come up with emergency funds to mitigate lending restrictions and to guarantee bank deposits in order to ease the credit crunch they were facing. While the economies of the GCC were hoping the international crisis would blow right by them, Standard & Poor’s noted that, “recent events have shown that as these economies have opened up to the rest of the world in recent years, so too have their vulnerabilities to global economic conditions.” Merrill Lynch expects non-oil GDP growth in the GCC to decline to 7.5% in 2008 and to a mere 5% in 2009. Budget surpluses are also predicted to drop sharply, with Merrill Lynch’s forecasts reporting the current account surplus to plummet from 22% of GDP in 2008 to 15% in 2009. As for Lebanon, the IMF forecasts GDP growth in 2008 to have reached 6% and to drop to 5% in 2009. The Cedar Republic, on the other hand, was not affected in the same way by the global financial crisis. To cushion the effects on local banking sectors, governments around the Gulf have been injecting sizable amounts of liquidity into their banks. Paradoxically, the Lebanese banking sector continues to loan to its government and not vice versa. In the UAE, for example, the central bank plans to feed an estimated $19 billion into domestic banks across the Emirates. Other members of the GCC have announced similar plans, with Saudi Arabia’s central bank voicing a capability and willingness to inject cash into its local banks if and when necessary. David Gibson-Moore, president of BMB Group, believes that the banking sectors of the Gulf have “held up well in 2008” and that even though direct exposure to the subprime crisis has been limited until now, “further exposure is likely to surface.” Lebanon had also not been exposed to the subprime crisis, because the Lebanese central bank has — for quite a few years — imposed tight regulations on the banking sector, prohibiting its banks from investment in structured financial products. Seeing as the Gulf’s state finances are quite robust, the banking sectors of the GCC will surely be able to stay comfortably afloat despite the turbulences. Without such buffering support from their governments, banks in the Gulf would undoubtedly be feeling the effects of the international financial crisis much more.

Most experts hold that banks in the Gulf have been almost entirely unaffected by the global crisis. Such statements are expected — no one wants to hear the grim truth that if it weren’t for the local governments having the ability to provide large amounts of cash to the banks, many of them would have collapsed or would have been forced to merge with other banks. Analysts are dismissing the need for mergers and acquisitions, while some banks are revealing their inclinations towards ‘possible’ mergers in the future. Obscurity is rampant in these uncertain times and it seems neither mergers nor acquisitions will surface until mid to late 2009.
There are many lessons to be learned from the global crisis and the failures of major regulatory frameworks (such as Basel II). Seeing as Lebanon has been able to successfully insulate its banking sector from regulation failure, maybe regional banks could learn a lesson or two from the Banque du Liban. Regional banks need to make sure their money supply is properly supervised, especially since past controls were rather lax and thus “fed the asset price bubble,” said Gibson-Moore. Also, in order to maintain stable levels of liquidity, regulatory systems must be firm and sustained to make sure banks are lending sensibly. To ensure banks do not continue with their bad habits, Gibson-Moore noted that, “compensation systems need to be properly aligned with the successful long-term performance of banks.” Another lesson to be learned from global chaos is that banks and financial sectors altogether need good governance, with board members “that understand what is happening,” stated Gibson-Moore.
In general, the true effects of the crisis will be felt by banks across the MENA region early next year. Gibson-Moore believes that, “the effect of the financial crisis on the banks in the GCC countries is [to] be far from negligible and it will not be confined to the financial sector but it will [also] affect the real economy as well.” Banks in the Gulf are all facing challenges of how to maintain liquidity and the regulators in the GCC “are going to play it safe and be [more] cautious” in 2009, and rightly so, said Gibson-Moore. Lebanese banks, in stark contrast to their Gulf counterparts, have had no problem stabilizing liquidity, as theirs is one of the most liquid sectors in the world. Gibson-Moore feels there is an “urgency for tougher controls,” especially in Qatar and Dubai. Seeing as banking assets per capita are “still relatively low in most GCC countries,” Gibson-Moore contended that, “this leaves sufficient room for growth for all participants [in the Gulf].” Much is to be learned from the mistakes of 2008 and even more from those that began well before the 2008 fiscal year (in terms of investments and lenient policies). Still, Pik Yee Foong, CEO of Standard Chartered Bank Lebanon, expects the Gulf economies “to remain strong.” Most bankers and financial powerhouses are optimistic that although 2009 will present many challenges and growth will slow, banks are expected to perform reasonably well.

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Tourism

Lebanon – Back on the map

by Executive Staff
written by Executive Staff

Since the assassination of Prime Minister Rafiq Hariri in 2005, the Lebanese tourism industry has fallen victim to one crisis after the other. This year, as feuding political factions struck a fragile peace in Doha, Qatar, the industry recovered some of its former luster, with Arab tourists and expats flocking equally from East and West.

As the summer approached, market players in the tourism industry kept their fingers crossed, hoping for a good summer season to beef up their fragile balance sheets in a country where Arabs visitors usually represent about half of hotel reservations. Tourist figures have drastically changed since 1974, the last year before the Lebanese Civil War. That year, 500,000 Europeans and 900,000 Arabs visited Lebanon and the tourism industry accounted for 19.4 % of the national GDP.
“Ever since the end of the war in 1990, Lebanon has not been able to reclaim its former status as one of the region’s prime tourist destinations. The structure of Lebanese tourists has changed as well with many of the incoming flows of foreigners actually being Lebanese nationals holding dual citizenship. Other factors that have also affected Lebanon’s performance in terms of tourism figures can be attributed to the emergence of new destinations such as Jordan, Syria and Turkey, while Arabs have also started venturing into new countries, such as in Asia,” explained Mohammad Chamsedine of Information International.

By the numbers
In 2004, just four years ago, 1,278,500 people visited Lebanon, 457,000 of whom stayed in hotels for a total of 1,018,000 tourist per night. Over the next three years, the number of visitors steadily dropped, from 1,140,00 tourists in 2005, to 1,063,00 in 2006, and then just 1,017,000 in 2007. Information International estimates average expenditure of tourists visiting Lebanon at about $1,000. According to figures provided by the Ministry of Tourism, about 984,000 tourists came to Lebanon this year excluding the months of October, November and December, which will most likely witness growing numbers with the Adha and Christmas holidays, thus possibly reversing the trend of the past years and restarting a growth in visitor numbers.
Chamsedine estimates that one of the main obstacles to the development of the tourism sector resides in the weakness of its budget, estimated at $7.8 million in 2008. “The contribution of the tourism sector to GDP varies between 8% and 11% but it is difficult to assess if one takes all other sectors involved, such as the retail industry, that without a doubt contribute indirectly to it,” said Pierre Achkar, head of the Lebanese Hotel Association.
Independent economist Ghazi Wazni adopted a more conservative estimate, bringing the figure down to about 6%, comparing it to the Gulf countries’ 15% level. “In 2007, the sector’s growth was at 9% in various Arab countries, while it was nearly negative in Lebanon. Lebanon also lags behind in terms of investment in the sector,” he explained.
In the last few years, hotel industry growth plummeted due to the 2006 War, as well as to the multiple political crises that shook Lebanon. “The situation was a real disaster until the month of May, when the Doha Accord was struck. Occupancy in hotels located outside of Beirut did not exceed 5-7% and only reached 20% or 30% for hotels in the capital. After Doha, the situation improved dramatically, with hotel occupancy reaching 44% in June, 65% in July and 90% in August. This also reached hotels outside Beirut where reservations were rerouted when the capital’s hotels were overbooked,” said Achkar.
The head of the hotel syndicate explained that Lebanon remains a very attractive destination for tourists because of the country’s natural beauty, the hospitality of its people and the lifestyle they lead, the affordability of prices relative to the region as well as the quality of the service provided by industry players.
As hotels, travel agencies and restaurants slowly emerged from their 2006-08 slumber and came back to life, they were accompanied by a flurry of cultural activities such as festivals, estimated this year at about 60 by Nada Sardouk, general director at the Ministry of Tourism. “The number of incoming tourists also grew due to the facilitation of visa procedures for over 36 countries, a process which was jump-started by the late Prime Minister Hariri. During his recent trip to Egypt, Prime Minister Fouad Saniora discussed easing up visa formalities for Egyptian tourists. A distinction was established, however, between working and tourist visas,” Sardouk added. Despite these optimistic developments, some nationalities were scared away by their countries’ negative travel advisories, like in the case of Saudi Arabia, after threats were voiced against their governments.
The director said that the number of restaurants grew by about 325 venues, while some 20 new hotels and residences opened their doors. “Investments in the sector are increasing significantly, which in the case of hotels are usually a mix of Arab and Lebanese capital, while the restaurant business is essentially funded by locals,” Sardouk said.
The restaurant business has been booming as well. During the last two years more than 300 new restaurants have been launched, mainly in the Greater Beirut and Kaslik areas, according to Paul Ariss, president of the Syndicate of Restaurant and Café Owners. Ariss estimated that about 70 venues opened in Gemmayzeh and Saifi, 10 in Ashrafieh, 50 in Hamra and Verdun, 40 in Antélias and Dbayeh, 30 in Kaslik and Jounieh and 10 in Batroun.
Sardouk explained that most restaurants setting up shop in Lebanon are not snack venues but rather high quality gourmet restaurants. “Some investments that poured in are massive, as an example we have witnessed that the cost of the land alone for one project was $4.5 million. Smaller projects usually vary, however, between $200,000 to $500,000,” she added.
However, not all is rosy. Ariss pointed out that in Beirut’s downtown, not all restaurants have reopened their doors, with only 40-50 restaurants, out of 104, resuming operation. “Despite the dramatic events in 2006 and 2007, restaurants located in the North, the South, the Bekaa and Mount Lebanon did succeed in keeping up, since they mostly are owned and run by families with very low operational costs,” he added.
One of the main setbacks for the tourism sector is the brain drain that occurred in Lebanon in the wake of the 2006 and 2007 events, forcing thousands of skilled laborers to look for jobs abroad. “This happened at a time when the economies of Dubai, Abu Dhabi, Qatar, Kuwait and Saudi Arabia were booming and investments in hotels and restaurants were skyrocketing. Although most universities have high-level hospitality schools and there are a few recommended technical schools, the graduating staff does not comply with the local and regional demand, leaving a gap on the level of the local market in term of recruitment,” explained Ariss. Moreover, the increase in local restaurants and the high number of franchises of Lebanese concepts — not only Lebanese food — have created a very sharp demand for skilled labor.
Lebanon has also been unable to recover regional levels in terms of business conferencing. “Hundreds of conferences take place every year in the region, of which Lebanon is unable to attract more than 20,” said Chamsedine.

The Lebanese forté
However, Ariss was keen to emphasize that “the strengths of the industry in Lebanon remain in the dedication, innovation and professionalism of market players. As an example, during the last four years more than 30 restaurant companies, such as Casper & Gambini, Waterlemon, Burj Al-Hamam, Kabab-ji, Crepeaway, Zaatar w Zeit, Roadster Diner, Lina’s Sandwiches, etc. have been signing more than 400 franchise contracts in the Arab countries. This is living proof to the strength of the industry, whether nationally, regionally and someday internationally. Most of these companies are ISO-certified since they have been trained with Qualeb and ELCIM.”
As long as political stability remains, Lebanese emigrants, Lebanese expatriates and foreign visitors will arrive steadily. “The tourism industry will keep on expanding and pulling up its share of the GDP from 10% to more than 15% in 2012,” Ariss claimed. According to Sardouk, VAT figures from tourist activities improved by 40% last year and some 1.2 million tourists will have visited Lebanon by the end of 2008, in addition to the one million Lebanese expats who flock annually to their home country.
Achkar concurred, saying that most hotels around the country are fully booked, while he added that he doubts the global financial crisis will directly affect Lebanon. Achkar explained that although the crisis may impact investment levels, it will not hurt actual tourism figures. “Lebanon has an excellent year, ahead provided stability reigns over the country in the coming months,” Achkar concluded.

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Private Equity

Maghreb‘s frontier feel evolves to emerging market

by William Fellows
written by William Fellows

Although marked by the escalation of a global financial crisis, the close of 2008 is also showing the results of a healthy fund-raising season for a third generation of venture and private equity funds in the core Maghreb countries, with Morocco leading in domestic funds raised, followed by Tunisia.

Interest in Maghreb markets has followed a boom in global emerging markets’ private equity that began in 2005. As the model has proven itself, venture capital and private equity industry investment in the region have grown. Local Moroccan fund managers raised at least $1 billion in the 2006-2008 fund-raising season, an unprecedented sum that more than doubled funds under management, with a third generation of local fund managers gaining the confidence of core local and foreign fund investors for second or third funds.
In Tunisia, the Maghreb and Africa regional manager Tuninvest stood out, raising $161 million for its second Maghreb Private Equity Fund (MPEF II) covering the entire Maghreb region. This amount was more than double its first MPEF fund and Tuninvest also closed a second pan-African fund, a $25 million fund for investment in the African financial sector. The only Maghreb-based and Maghreb- focused PE fund, MPEF II is expected to emphasize Morocco and Tunisia, due to their greater attractiveness in terms of market depth and eventual exit opportunities. With reasonably successful private investment track records, attractive investment and business environments, and maturing and reforming financial markets, both countries are on the path to successfully leveraging their proximity to the wealthy Western European markets.
Venture or PE investors are drawn to the two countries’ domestic market growth and improving export capacity, as well as the emergence of a real exit market. These investors have achieved attractive trade sale valuations in deals with regional and European players, who are looking for the kind of quality firms that venture and private equity investors have nurtured. In the case of Morocco, the bourse has proven to be an attractive liquidity option for outstanding firms, and remains by far the leader of Maghreb region bourses in terms of liquidity.
Tunisia and Morocco now stand out as the leaders in venture and private equity investment in the southern Mediterranean basin and African continent. Other members of the Arab Maghreb Union (AMU) like Algeria, Libya and Mauritania, remained frontier markets for venture and private equity investors in 2008. And even though these countries are undertaking reforms to render private investment more attractive, they will remain frontier markets in a more cautious 2009. Challenging private investment climates with high uncertainty, cumbersome foreign investment and trade regimes, and limited exit possibilities will continue to limit classic venture or private equity investment. However, they will continue to attract discrete investments (versus dedicated funds), as market reforms take hold to enable better private investment and exit opportunities. As financial and investment infrastructure matures, the natural attractiveness of these markets will render classic private equity and venture investing more consistently profitable and secure, and thus attractive

The year ahead
Looking to 2009, the current global economic uncertainty and a global financial freeze that has touched most if not all major investors, suggest that 2008 marks the close of the current Maghreb fundraising boom. Nevertheless, the roughly 18 country or regional (Maghreb) funds, raised by Maghreb region fund managers in the 2006-2008 season, face an encouraging opportunity to invest well and counter- cyclically at attractive valuations in growth firms for an attractive exit in 3-5 years time. If local Maghreb firms can follow this investment cycle and intelligently overcome the near term market challenges, they will be well positioned to realize important returns after investing counter-cyclically. International funds, whether global or Middle Eastern, will likely continue to invest opportunistically but will be limited by investment focus and size.
The leading Maghreb region countries benefit from having launched small-and-medium-sized (SME) focused private equity and venture capital sector initiatives relatively early. Despite early disappointments, sustained public support as well as active investor interest driven by market liberalization helped overcome early disappointments and deliver real returns to patient investors.
The launch of first generation funds in 1991-1994 disappointed, returning more in terms of learning for local teams than financial returns to investors. The second generation of local Maghreb funds, mostly bank affiliates of 1999-2001 vintage, focused on later stage, largely growth and buyout investments of around $1-5 million in medium sized local or regional firms, as well as minority partnering in major investments by European firms in key growth areas like telecoms and tourism services. This strategy, in keeping with the investment teams’ more financially oriented profiles as well as market maturity and needs, seems to have paid off. While early stage venture investing has presented attractive opportunities for venture oriented funds with appropriate teams, a conservative business culture with a heavy orientation to founder and family control has limited opportunities. Similar challenges have limited the scope of later stage venture or ‘small’ private equity investments. Nevertheless, thanks to domestic market modernization and an emerging back flow of experienced Maghrebi managers from Europe and North America, venture and private equity firms have been increasingly successful in two arenas: one, investing in startups launched by ‘reverse brain drain’ managers with European or North American experience and two, attracting management talent to support buyouts or ‘transition financing’ as the post- colonial generation of managers near retirement and look to professionalizing their firms.
High-quality, objective benchmarking data is unfortunately not yet available, although reliable anecdotal data indicate that best second performers (with an unsurprising overrepresentation of independent fund managers) matched or beat their investors’ benchmark return expectations. Although a majority of exits realized from this generation were private trade sales (i.e. acquisition by another firm), some notable IPOs have been possible in Morocco, most notably High Tech Payment Systems (HPS).
Looking forward, investment focus for the third generation of funds remains relatively stable, with Maghreb region funds looking at growth and management buyout opportunities in a range of sectors. There is an accent foremost on opportunities in industrial investment in off-shoring, particularly the outsourcing of parts and components to lower-value finished products in the electronics and automotive areas. This is followed by interest in the telecom and IT sector, including investment in off-shoring oriented IT services like call centers. Other areas that are attracting investment include agribusiness and transport, both areas in which emerging modernization trends are expected to create real growth and innovation opportunities.
In the Middle East, mega private equity funds are the trend, at the upper end of hundreds of millions of dollars, with minimum to average investments in the upper
double-digit millions. In the Maghreb, locally-managed funds still remain modest in size, with most in the $15-50 million range, focusing on SMEs (mostly medium sized firms in industry and services). Initial investments fall largely in a $1-5 million range, with a few deals reaching $15 million. In contrast with the Middle East, core Maghreb region business expansion and growth seems to be driven by north-south opportunities, with Maghrebi firms and financers looking north to Europe and south to sub- Saharan African neighbors for export opportunities. Current linguistic affinities and ancient commercial connections help drive this orientation, assisted by an advantageous competitiveness and market familiarities.
The leading local venture capital and private equity firms have followed leading Maghrebi industrial and service sector firms in taking a north-south orientation, as evidenced by the only Maghreb regional fund manager, Tuninvest Group, managing both Maghreb and sub-Saharan venture and private equity funds. At the same time, for a variety of practical reasons, Maghreb-Mashreq investment has lagged. Anemic cross investment is an ongoing challenge. While Middle Eastern private equity and venture capital funds do often include the Maghreb in their prospectuses, actual investment has not followed. Subtle intraregional differences have impeded a comprehensive MENA strategy for private equity and venture capital.

The bottom line
Historical venture and private equity investment experience in the Maghreb has confirmed the classic observation, that all good venture investment is local. Regional differences in business style, a lack of Maghrebi integration and the relatively small size of PE investments continue to limit regional corporate strategies, in spite of a real potential for complementarities. These factors hinder a more dynamic Mashreq-Maghreb investment business and investment connections.
But overall, Maghreb region funds are well positioned to invest during this difficult economic cycle. An expanding investor base, with significant private local capital in partnership with international investors (increasingly private and European), should support the development of a well-institutionalized sector. The emergence of a pool of experienced local venture or private equity firms with clear local mandates matching market needs is encouraging for future growth.
Overall, 2009’s key opportunities in the core Maghreb countries (excluding the oil sector), will continue to be in industrial and services off-shoring, with a focus on leveraging the region’s proximity to Western Europe. Opportunities will emerge in the domain of modernizing lower value added agricultural products to export high- value added processed products to Europe. In the tourism sector, investment in the management and services sector of underdeveloped areas is also anticipated. The energy sector, outside of Algeria’s hydrocarbons, has attracted a potential interest, particularly in renewable energy. Algeria remains a country with high potential but considerable complexity on the frontier of private equity and venture capital investors. Although Algeria is attractive to PE investors, especially those looking for “chunky” investments, the absence of near-term exit strategies and ongoing delays in structural reforms are still deterring investment.
Maghreb-based funds will remain the most effective vehicles for investment in Maghrebi markets, where successful equity investment windows remain small in terms of initial equity sizes and ill-fitted to global or MENA fund investment needs. But in spite of logistic hurdles, the Maghreb region remains well positioned to capitalize on its connections with Western Europe.

WILLIAM C. FELLOWS is country director – Maghreb, Financial Sector Reform Program with FSVC

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